Mattel defends timing of toy recalls

Company has no plans to stop doing business in China

Company has no plans to stop doing business in China

NEW YORK — With its reputation bruised by the second major recall of Chinese-made toys tainted with lead paint in a matter of two weeks, Mattel Inc. on Tuesday defended the measures it has taken to ensure the safety of its toys.

"I am disappointed in what has transpired," said Robert Eckert, chairman and chief executive officer of Mattel, the world's largest toy maker.

"No system is perfect," he said. "We are continuing to test thousands of toys, and we could have additional issues."

Mattel, which had cultivated an image of tightly controlling production in China, has increased its monitoring of Chinese factories and launched an advertising campaign.

Still, with China offering the cheapest source of labor supply, Mattel, like other toy makers, continues to do business there.

Despite negative publicity, investors haven't pummeled the stock. Shares of Mattel fell 57 cents, or 2.4 percent, to $23 Tuesday, on a day when broad market indexes fell. The stock is trading at the low end of its 52-week range of $21.52 to $29.71 per share.

Mattel's worldwide recall involved 436,000 die cast "Sarge" cars related to the character from the movie "Cars" because they contained lead paint.

It also extended a November 2006 recall of toys that contain magnets that can be swallowed by children; they included Polley Pocket dolls and Batman action figures. That recall now encompasses 18.2 million magnetic toys worldwide.

The recalls follow the actions taken by the company two weeks ago when it recalled 1.5 million products from its Fisher-Price unit worldwide. That recall, for lead paint, involved characters such as Dora the Explorer, Big Bird and Elmo.

The latest recall sparked fresh concerns over whether Mattel should have warned the public sooner.

The Consumer Product Safety Commission is looking into whether the company's Fisher-Price unit let the agency know as quickly as it should have about its lead paint problems.

And Mattel was questioned by themedia again about the timing of its disclosures on the latest recall.

Company officials said Mattel discovered that there may be a potential lead paint issue between the end of July and the beginning of August, and notified the CPSC a few days later, after doing more testing.

Kmart spokeswoman Colleen Cleary declined to comment, except to say that the chain was clearing any affected toys from its shelves Tuesday.

Wal-Mart said in a statement that it has pulled the items from its shelves and put an electronic block on its cash registers so that recalled products could not be purchased.

The world's largest retailer noted that many of the recalled toys were older and no longer being sold, but that it would "provide a refund ... if a customer would like to return any of the affected products to us."

Mattel discovered the latest problem as part of a wide- scale investigation into all of its Chinese factories following the discovery of the Fisher-Price lead paint problem, the company said.

Gerrick Johnson, an analyst at BMO Capital Markets, questioned why it took so long for Mattel to disclose the most recent recalls when the company incorporated a $30 million charge for recalled products in its second-quarter filings with the Securities and Exchange Commission.

"You have to alert the public right away," he said. "I think it's a public relations nightmare more than anything else."

In the Aug. 3 SEC filing, Mattel said that additional information became available in July on "other smaller product recalls, and similar charges were recorded."

Eckert said the company was vague in its filing because it didn't know which toys were involved and exactly how many were affected.

Kathleen Waugh, spokeswoman at Toys R Us, the nation's second largest toy seller, said she was notified Monday night, and Toys R Us immediately removed the affected products from its shelves.

The recalls will likely scare off many consumers this holiday season, putting a damper on Mattel's sales into next year, Johnson said.

"If you wanted to know what the top-performing brands were over the last year, well, they were Elmo, Dora, Cars, and all of them are being subject to recall in some way or another, and all of them involve lead paint," Johnson said.

"I think, on the margins, you'll get some consumers who won't buy those products."

The Mattel actions follow a string of other recalls of Chinese-made toys this year, ranging from Hasbro Inc.'s faulty Easy Bake Ovens to RC2 Corp.'s 1.5 million wooden railroad toys and set parts from its Thomas & Friends Wooden Railway product line, which contained lead.

As a result, Johnson lowered his revenue outlook for Mattel by $25 million in 2007 and $40 million in 2008.

Johnson also cut his earnings per share estimates by 3 cents to $1.47 in 2007 and by 5 cents to $1.60 in 2008.

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